Could Yunnan Water Investment Co., Limited (HKG:6839) Have The Makings Of Another Dividend Aristocrat?

Dividend paying stocks like Yunnan Water Investment Co., Limited (HKG:6839) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

In this case, Yunnan Water Investment likely looks attractive to dividend investors, given its 6.3% dividend yield and five-year payment history. We'd agree the yield does look enticing. During the year, the company also conducted a buyback equivalent to around 43% of its market capitalisation. Some simple research can reduce the risk of buying Yunnan Water Investment for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Yunnan Water Investment!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Yunnan Water Investment paid out 32% of its profit as dividends. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

Consider getting our latest analysis on Yunnan Water Investment's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Yunnan Water Investment has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.1 in 2016, compared to CN¥0.06 last year. This works out to be a decline of approximately 9.7% per year over that time. Yunnan Water Investment's dividend has been cut sharply at least once, so it hasn't fallen by 9.7% every year, but this is a decent approximation of the long term change.

A shrinking dividend over a five-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. In the last five years, Yunnan Water Investment's earnings per share have shrunk at approximately 7.1% per annum. A modest decline in earnings per share is not great to see, but it doesn't automatically make a dividend unsustainable. Still, we'd vastly prefer to see EPS growth when researching dividend stocks.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're glad to see Yunnan Water Investment has a low payout ratio, as this suggests earnings are being reinvested in the business. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Yunnan Water Investment out there.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 4 warning signs for Yunnan Water Investment (2 are significant!) that you should be aware of before investing.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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